P2P investing doesn’t have to be taxing
It’s never too soon to think about your taxes, and in the aftermath of Jeremy Hunt’s debut Budget, higher taxation is on many peer-to-peer investors’ minds.
So what do you need to know about taxes and P2P?
First and foremost, where possible all P2P investments should be held within an Innovative Finance ISA (IFISA) wrapper. Up to £20,000 can be shielded from tax in an ISA per tax year, although currently only one new IFISA can be opened per tax year. However, transfers from existing IFISAs are allowed.
Without IFISA protection, returns earned from P2P investing will be taxed at the usual capital gains tax rates. P2P lending is included in the personal savings allowance, which means that basic rate taxpayers can earn up to £1,000 from their P2P investments before paying taxes, while higher-rate taxpayers can earn £500. Bad debts – meaning defaulted loans or investments in defunct platforms – are tax deductible.
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In his Budget statement, Hunt confirmed that he would be overhauling the way capital gains taxes are collected from next year. At present, investors can earn a whopping £12,300 each year from their investments before paying tax. From next year this allowance will be cut to £6,000. In 2024, it will be cut again to £3,000.
This means that the average P2P investor is soon likely to face higher taxation on their earnings, especially if P2P platforms continue their track record of delivering between seven and nine per cent in average annual returns.
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However, there is still time to plan. As well as making use of the IFISA allowance, some P2P platforms allow investors to include their investments in a self-invested personal pension (SIPP). Earlier this year, Kuflink launched a SIPP pool and other lenders have indicated that they might follow suit.
As the tax squeeze continues, it is likely that P2P platforms will look at other ways to protect their investors’ returns and make it easier to manage their portfolios.
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